Don’t lose sight of the bottom line in the giddy rush of a new project
Our ultimate aim in the management of an architectural practice is to ensure we always have the financial resources that will allow us to do the sort of design work and build the sort of buildings that we would choose to do. If we do not have the cash in the bank to pay the staff and the rent, then no amount of vision or creativity will result in projects getting built.
We must ensure that we make sufficient overall profit to keep the practice going. The best way to ensure we arrive at the desired level of profit at a practice level is to monitor the performance of each project as it progresses. By adopting the discipline of planning the financial targets of each new project as it comes in, and then comparing its performance to that plan, we have a far better chance of achieving the overall result we would like.
It is often quite difficult to capture all of the necessary financial information at the outset of a project. Still elated from having won the assignment, there is a natural enthusiasm to ‘get stuck in’ to the design process and not worry about what may seem to be peripheral paperwork. This is one of those occasions on which it is necessary to introduce the tension between the design process and financial reality. If we do not ensure at the outset that we know what we expect to get paid for this project, and what we intend to spend to earn this fee, there is a significant chance that we will find ourselves at the end of the project with only a vague sense of whether the project was financially worthwhile.
Recording of time and project monitoring
Detailed recording of time is one of those ‘boring’ activities that does not come easily to many architects. The advent of electronic time recording systems has made the process much easier. Yet in any practice, it seems there will always be about 10% of the staff who are always late in submitting their timesheets (and expenses). This is not restricted to architects; every professional services firm encounters the same issue.
I have tried a wide variety of strategies to encourage these reluctant few to come into line. Neither carrot nor stick seems particularly effective. The most workable solution I have used is an automated reminder system, backed up with tenacity and a sense of humour. It is, however, essential for the integrity of the costing system that all time is properly recorded as soon as possible.
In my experience working with solicitors and accountants, who are usually obliged to record their time in six-minute units, there is much greater awareness that time really is money
I am always concerned that there is a disconnection in the mind of the architect between the time they are spending on a project and its eventual profitability. When the final reckoning comes there is often an element of surprise that the financial result is disappointing. In my experience working with solicitors and accountants, who are usually obliged to record their time in six-minute units, there is much greater awareness that time really is money.
The use of modern fully integrated project management and accounting software should make it much easier to track the financial position of each individual project and the practice overall. Yet there still seems reluctance to engage fully with the process of keeping the information in the software up to date or to abandon imperfect home-made tools such as spreadsheets. As an accountant, I am a great fan of the spreadsheet and use them extensively. However, I am also aware that there comes a point where the amount of manipulation of data required is beyond the scope of the spreadsheet, or more accurately beyond the skill level of the spreadsheet user. This is the point at which to acknowledge that project accounting software is going to be a worthwhile investment of time and money.
Many architectural practices attempt to survive on wafer thin net profit margins of 5% or less. Generally, most businesses aim for a net profit of 15%-20%, as experience has taught them this is the level of return required to ensure the continued success of the business. The problem with not making enough profit is that an unexpected cashflow problem can cause severe distress and that funds are not available for reinvestment in the business. This means it becomes difficult to afford the latest hardware and software or to have funds to launch a promotional campaign or a new service. The lack of financial reserves, built up in the ‘good years’, means most practices have no choice but to engage in redundancy programmes as soon as there is any downturn.
Architects are rightly concerned about sustainability – yet their financial behaviour often risks the sustainability of their own practices. It is vital to use project monitoring tools to ensure that enough profit is made by the practice overall, or else it simply will not be there in a few years.
Brian Pinder-Ayres is author of Financial Management, published by RIBA Publishing.